Compensation Chapter 14

Why do some companies use a dual-career ladder?

- To provide two ways of progressing, either the managerial or the professional track

What is the differential in pay between a CEO and the average worker?

302:1

Who is and what is the job of the corporate directors?

A board of directors providing strategic decision-making advice - 8-11 individuals from both inside and outside the company

What are the components of an executive pay package?

Base salary, short-term (annual) incentives or bonuses, long-term incentives, benefits, and perquisites (Slide 10)

What are contingent workers?

Contingent workers are anyone hired through a temp agency, anyone on an on-call basis, or independent contractors. - Those in the first two categories generally earn less than traditional workers and those in the latter category earn more.

What is a common approach of compensation committees ?

Identify competitors and set pay level between the best and worst • Where a CEO falls in this range depends on many factors. • CEOs likely to be raided generally have higher compensation. • Larger companies hit the high end of the range.

What is required from the Dodd-Frank Act?

Shareholders vote on the compensation plan for its five highest paid executives The vote is nonbinding but 97-99% of votes approve executive pay (Slide 9)

What perks do organizations develop to satisfy the needs of professionals?

• Flexible schedules, large offices, campus-like facilities, and lavish athletic facilities.

Why the move to contingent workers?

• It may signal a permanent change in the way business is done. • Temp workers afford a level of flexibility. (slide 27)

What did research conclude about the relationship between CEO pay and company performance?

THEY ARE STRONGLY ALIGNED • The pay-performance relationship is often not optimally studied. • After correcting, the authors found strong relationships between CEO return and total shareholder return. • In some cases, what looks like a lack of alignment probably is not.

What does the challenge in compensating supervisors center on?

equity

How do people respond to these pay levels and CEO pay ratio?

• 74% of average Americans feel CEOs are overpaid and should make no more than 6 times the pay of an average worker. • Respondents thought CEOs should receive 0.5% bonus if the value of their company rose by $100 million. • In a survey of company directors, only 18% disapproved of CEO pay. • Those respondents felt the CEO deserved 1.5% if the firm's value increased by $100 million.

Beyond the typical benefits, many executives also receive:

• Additional life insurance. • Exclusions from deductibles for health-related costs. • Supplementary pension income exceeding ERISA maximum limits.

What are some ideas from executive decision makers that impact corporate success?

• Linking compensation to stock price effectively motivates success. • Performance awards are the most important incentive program. • FW Cook shows that total shareholder return (TSR) is the most common measure of performance in relation to that of competitors. • The next most common measures were profit, capital, efficiency, and revenue with nonfinancial measures used less often.

Why use agency theory why determining executive pay?

• One variant says CEOs are self-protective and make decisions to solidify their positions and maximize personal rewards. • Behavioral agency theory suggests CEO are risky to accumulate future wealth, and conservative to protect current wealth. (Slide 21)

Why would many companies fill boards with outside directors

• Perceived as less probe to bias than internal directors. • Internal members used to "rubber stamp" the CEO's decision process. • Now a director faces highly charged analysis of many things, including CEO compensation. • There is considerable risk as stockholders may sue directors.

True or False: ERISA and tax code restrict benefits too far above other workers.

TRUE • Plans may have to cover 80% of employees, provide determinable benefits, or meet vesting and nondiscrimination requirements.

What can be done to attract workers into supervisory jobs?

• Provide a 5-30% differential from the top-paid subordinate. • Pay for scheduled overtime. • There is an increased use of variable pay.

What are maturity curve?

A plot of the empirical relationship between current pay and years since a professional has last received a degree (YSLD), thus allowing organizations to determine a competitive wage level for specific professional employees with varying levels of experience. - reflect the years of experience in the labor market.

What is agency theory?

A theory of motivation that depicts exchange relationships in terms of two parties: agents and principals. According to this theory, both sides of the exchange will seek the most favorable exchange possible and will act opportunistically if given a chance. As applied to executive compensation, agency theory would place part of the executive's pay at risk to motivate the executive (agent) to act in the best interests of the shareholders (principals) rather than in the executive's own self-interests.

True or FALSE: Tax and regulatory agencies do not require a value on "perks."

FALSE! THEY DO! • If the CEO of the Shaw group dies, the company will pay his family $18 million for him to not compete against Shaw for two years. • 7% of Fortune 500 firms give cash allowances, averaging $32,000. • A personal car, and driver.

Who are Special Groups?

Groups that receive special treatment. • Either in the form of add-on packages not received by other employees. • In the form of compensation components unique in the organization. examples: Supervisors, top management, boards of directors, scientists and engineers, sales personnel, and contingent workers.

What reports came back from the FV Cook annual survey of the top 250 companies?

• 83% have non-discretionary plans, all using financial measures. • Commonly profit, revenue, and cash flow. • Non-financial measures were used in 52% of plans. • Strategic, individual or discretionary measures. • Payouts were weighted heavier to financial measures. (Slide 11)

What is the explanation for executive compensation that focuses on the level of wages?

• CEO worth should correspond to some measure of company success. • Or CEO salaries are tied to labor markets and competitor pay levels. • Some say social responsibility should be a measure of company value.

What is the social comparison explanation for explaining executive compensation?

• Executive salaries bear a consistent relative relationship to compensation of lower-level employees. • Critics point out the gradual increase in the spread between executives' compensation and average salaries of people they employ.

Why might stock options not link to performance?

• Executives may exercise their options in a rising market which does not reflect on any specific actions of their own. • In a falling market, stock options are under water and may be re-issued. • Executives may "game the system" through a large stock buyback.

What are some of the concerns over CEO pay structure that leads to bad behavior?

• Heavy use of bonuses and stock-based compensation may lead to taking too large of risks. • The Dodd-Frank Wall Street Reform and Consumer Protection Act: • Improves accountability and transparency in the financial system. • Proposes to end "too big to fail" and ending bailouts. • Aims to protect consumers from abusive financial services practices.

How do the product or service influence design of a compensation plan with regards to sales?

• Products with high barriers to entry need compensation with a large base-pay component, minimizing risk. • Products with low barriers to entry use a higher incentive component. (slide 26)

Why do pay committees recommend these amounts of pay?

• The committee and Board represent shareholder interests and CEO pay is a major cost but pales to the difference in shareholder returns. • Executive compensation reflects changes in the market. • Though critics are vocal, there is strong evidence of a strong pay-for- performance link in the pay of executives.

How has the sales job been morphed to meet the needs of the complex environment between the customers and the organization?

• The job can be outsourced and called either indirect sales force or manufacturing reps or even independent reps. • In-house sales jobs can be broken down by inside or outside reps. (Slide 23)

What are the six major factors that influence the design of pay packages?

• The nature of people who enter the sales profession. - Salespeople rank pay significantly higher than five other forms of reward. • Organizational strategy. • Market maturity. - Companies should adapt compensation to sales patterns as the product matures - focusing on customer satisfaction and retention. • Competitor practices. - External competitiveness is essential. • Economic environment. - Sales forces expand during good economic times and constrict during recessive environments. • The product to be sold.

What are the two characteristics of special groups?

• They tend to be strategically important to the company. • Their positions tend to have built-in conflict arising from different factions placing incompatible demands on members of the group.

What are the two types of compensation plans for a sales job?

• Unit rate plans differ by the amount they pay for each unit of sales. - Commissions are either flat, ramped, declining, or pooled. • Add-on plans focus sales staff on specific types of sales with extra incentives for each sale of that line.